Everything You Know About Taxes is Wrong

Pulitzer Prize-winning reporter David Cay Johnston talks about the retooling of the tax code to serve the very rich at the expense of the middle

Johnston: None of the news coverage of social security is addressing how it is a subsidy program for the super rich, none of it is addressing that President Bush is not being internally consistent when he says I want you to have more of your own money. Why isn’t he simply proposing that we reduce social security taxes by the amount of money he thinks younger workers shouldn’t pay, and then they can choose whether they want to spend it, which would stimulate the economy, or save it, which would stimulate long-term investment? Instead, why is he proposing to create a massive, new government program that will funnel fees to Wall Street? None of the news coverage is stepping back and asking that. It’s all reactive to what the president is saying. I think that’s in good part because the Democrats don’t have a clue. The Republicans have an agenda and the Democrats don’t have a clue.

Now, the reason the president would not propose letting younger workers pay a reduced social security tax in return for smaller benefits is that it would immediately expose that the financing of his tax cuts depends in good part on middle class workers paying excess social security taxes so that rich people can have lower income taxes. It would bring it right to the front of the budget debate. So they would never propose that.

CP: Besides which, privatizing Social Security will have huge benefits to the financial services industry-- the same donor class that’s benefiting from the shift.

Johnston: One of the salient features of Mr. Bush’s social security proposals is that the big brokerage houses and mutual fund companies, who have been major sources of campaign contributions, would earn huge fees as a result of the president’s proposal. And this is a perfect example of how the political donor class shapes government to benefit itself rather than the general welfare.

CP: And this political donor class continues to push this upward bubble with every tax reform.

Johnston: Yes. The steady trend of tax changes in the United States-- I argue starting in 1983, that’s the year I picked, although you can make some arguments for 1981—has been to shift the burden of taxes off those who are the greatest recipients of the benefits of society and onto the middle class and the upper middle class. And we’ve seen during this era this explosion of income at the very top that is not taking place in any other advanced economy. Now, taxes are not the only reason for this, but they are clearly a very important factor.

CP: You point out in “Perfectly Legal” that many of the tax mechanisms used to effect this shift are not available to you and me.

Johnston: Many of the devices that very wealthy people use to defer or avoid taxes are not available to middle and upper middle class people either as a matter of law—only the rich are allowed to use them—or the transaction costs are such that unless you’ve got millions of dollars, you can’t do it. Very wealthy people are allowed to have what amounts to unlimited 401k plans. Middle class people can only save $14,000, or if they are over 50 years old, $18,000. I show in the book that while these unlimited plans are theoretically riskier—if the company goes broke you lose your money—the reality is that in 10 companies that went bankrupt that I studied the bankruptcy records of, the executives all got 100 percent of their money. It was the works whose 401k plans were all wiped out.

I went to the University of Chicago Graduate School of Economics. I am not an economist, but that’s where I studied. And one of the very first things they pound into your head there is that there is no such thing as a free lunch. And so if you are a corporate executive, flying in a corporate jet virtually for free, somebody’s really paying for that jet. And that somebody is the shareholders of the company and the taxpayers.

CP: Given that we’re virtually all shareholders now, and we seem to understand that equation better than we understand the tax equation, so you think this is where the revolt might start?

Johnston: Maybe. I think one of the biggest problems America faces is the broad level of prosperity. There is literally a survey that shows more people can name Jennifer Lopez’s lover than their congressman. And so long as large numbers of people feel that they’re doing just fine economically, even if they have enormous risks that could wipe that all away tomorrow, they don’t look at the risks, they look at their status right now, I don’t think there’s going to be a lot of political support to examine the tax system’s socialist redistribution effect of taking money from the middle class and funneling it to the super rich. It’s not intuitive and while it’s unquestioned that the system is doing that, I have both right and left-wing economists who have sat on panels with me and don’t dispute my data, because it’s the government’s official reports, it’s not intuitive and I’m pretty much a lone voice out there pointing this out. I mean, there are some other people but there’s no big mass movement for it.

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